Are interest rates artificially low?

Date posted: February 23, 2012

By many measures interest rates are at a generation low. But all folks aren’t happy with this situation, and some say the government is purposefully holding interest rates down. N.C. State University Mike Walden takes a look at the issue.

“Interest rates are very low. They are low. And clearly if anyone has any reason to borrow money short- or long-term, this is an excellent time to do so.

“Now the question of whether they’re artificially low, I think, depends on a much more complicated analysis. The government, particularly the Federal Reserve, does have some control over short-term interest rates — that is, interest rates on loans or investments that are of a short duration. And clearly the Federal Reserve has pushed those interest rates down virtually almost to zero. So, you could argue that they’re artificially low.

“For longer-term interest rates, the Fed has less control, and yet those have also gone down. And I think you could argue that there are other reasons beyond government intervention as to why interest rates are low — one being we have low inflation. And inflation always affects the level of interest rates. And secondly we have relatively low demand for loans because of the relatively weak economy.

“So I think the bottom line here is that, yes, we do have low interest rates. We wouldn’t expect those interest rates to remain this low forever. But I think the key answer as to when interest rates will rise will really depend on the fundamentals in the economy. If the economy picks up some steam, look for interest rates to also pick up steam.”

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Economic Perspective, featuring N.C. State University economist Mike Walden and host
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